Buy Bonds: The Contrarian Case
Bond yields hit new highs not seen in years, and the crowd is in a panic. That panic is the buy signal. Here are 950 billion reasons to buy bonds, tied to the Treasury General Account.
Treasury Secretary Bessent said he would buy bonds, yields rose anyway, and traders stopped taking him seriously. The reason nothing moved yet: the first operation does not start until September 9th. The plan raises long-end buying on 10-year and 30-year bonds from $2 billion to $4 billion per operation. With four operations per quarter, that is $16 billion of buying per quarter, $64 billion per year.
This is not quantitative easing. QE ran $85 billion a month, and it printed money. This does neither. Bessent will simply be in the market adding liquidity to hold the 30-year yield near 5%.
Three more forces support bonds:
- Institutions locking in yield. Pensions with 6% hurdles can now lock in 5% for the next 10 years, guaranteed. Expect them to do it.
- Commercial hedgers. They hold the longest position in 10-year notes since 2018. These hedgers are always early and always right. From 2018 to 2019 the 10-year yield fell from 3.52% to 1.50% within 12 months. A move to 1.50% is not the call, but a yield with a "3 handle" (in the 3% range) is realistic.
- Deficit fears fade as tariff revenue comes in. Tariffs were shut off, so no income made the deficit look worse. Now Section 301 tariffs run 10% to 12% across the board, with a 50% tax on $20 billion of goods from Canada until it complies. That revenue is flowing in.
Inflation fear is temporary. The Iran spike is passing; 17 million barrels of oil got through, supply is finding its way around. Core CPI is down to 2.5%. Powell talked hawkish at Jackson Hole about PCE and said the job on inflation is not done, and consensus odds put a rate hike near 60%. Take the other side. Chance of a hike before the election: zero to 1%. A couple of strategists this week share that outlier view even as consensus odds climb.
Rotate Out of Semis, Into Defensives
September brings volatility, and it is already picking up. In June the call was to get out of the crowded trade in semiconductors and memory. In July they crashed - the average semiconductor fell 30% to 60%. Situational awareness cleared out of Citadel. August gave a dead cat bounce and short covering; now it is rolling back over.
Nvidia (NVDA) shows the warning. It crushed earnings and guided two years of revenue, yet it carries $250 billion in financing and vendor financing commitments, and the cost to insure its bonds stayed elevated - it did not come down. The bond market is smarter than the stock market. Watch Oracle (ORCL) CDS and hyperscaler CDS. The message: these firms are issuing a lot of debt, and the free cash flow to support it is not there yet. Into the fall, lighten up on the semiconductor and memory trade again, buy bonds on weakness, and buy out-of-favor defensives.
Pfizer (PFE): Paid 6% to Wait
Pfizer is so out of favor you cannot give the stock away, which is exactly the appeal. It pays a 6% dividend yield while you wait for the turnaround - and that yield beats the risk-free rate. The company had a COVID windfall and spent it: $43 billion to buy Seagen (CGEN), a deal set to produce $10 billion a year, plus $7.2 billion in cost cuts.
The fear is loss of exclusivity on major drugs, but that hit is lower than expected. Pfizer has a GLP-1, danuglipron/Metera, coming around 2027-2028 - a once-a-month GLP-1 available as a pill and by injection. Maybe it arrives late, maybe it is revolutionary; unknown. Meanwhile costs are out and the oncology pipeline is strong. All the bad news is already priced in. When your downside is protected, the upside takes care of itself.
Dentsply Sirona (XRAY): A Turnaround Special
The stock trades at seven times forward earnings and is down 80%. Buy low, sell high - a discipline few on Wall Street practice, which takes patience.
New CEO Dan Scavia came from Globus Medical, where as chief commercial officer then chief executive he oversaw a big run in the stock. The previous CEOs did a dumb deal and had to write down Byte, the invisible aligner everyone ordered during COVID.
Dentsply Sirona is the leading company in dental supplies and chairside milling, a 130-year-old company. Its CEREC machine lets a dentist take a picture, print a tooth, and fit it same day instead of the old 80-appointment, multi-week crown process. That technology is only 20% penetrated.
The prior management made the same mistake Nike (NKE) made going direct-to-consumer and cutting out wholesalers - Dentsply cut off supply agreements with Henry Schein, Patterson, and Benco, and the stock paid for it, like Nike's did. The new CEO reinstated all the distribution agreements: Atlanta Dental, Schein, Benco. Ramp-up takes about 6 to 9 months, after which results should jump. The stock could double or triple plus over the next few years. The story is common sense: costs out, revenues up. Dental visits are still below pre-COVID levels, meaning a backlog of deferred work is returning to the number one dental supply company globally. Europe has come out of its dental recession; the United States is next.
